Economic Performance and R&D

University essay from Högskolan i Jönköping/IHH, Nationalekonomi; Högskolan i Jönköping/IHH, Nationalekonomi

Abstract: Researchers tend to disagree on the direction of the relation among R&D and economic growth, suggesting that if economic performance determines R&D investments countries might overinvest in their R&D expenditure. The purpose of this thesis is therefore to shed new light to this question by first establishing a relation among the variables and thereafter investigate the Granger causality between them. This paper is based on a panel study consisting of 60 countries, with various levels of income during the period 1996-2015. Using a fixed effects model, we can establish a positive relation between growth in R&D expenditure and GDP growth and using Granger causality tests and the Toda-Yamamoto augmented Granger causality tests, we can conclude that the growth of R&D expenditure determines economic performance in the short-run for countries in all income levels, however no conclusions can be made regarding the direction of Granger causality in the long-run. Hence, our results show that R&D investments stimulate economic growth and should, to some extent, be favoured by policy regardless of a nation's level of development.

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